Show me the person and I will show you the rule. That seems to be the guiding principle of the Securities and Exchange Board of India (SEBI) these days, having gradually arrogated so much power that many of its actions go unquestioned. What started out as one of the first independent regulators in India has quickly turned into a unique body that makes the rules, checks their enforcement, conducts the investigation and also acts as the judge and the jury. Ironically, the fact that the SEBI board incorporates representatives of various economic ministries has only reduced oversight on the regulator’s functioning.
This is not a frivolous observation. Such are SEBI’s powers that it sometimes acts with lightning speed to cripple the business of a market intermediary (without any pressure to complete the investigation within a specified timeframe), or buries even major transgressions by simply letting the offender off with a warning (as with the Zee group’s role in the Ketan Parekh scam). Its discretionary powers have been further enhanced because it decides which intermediary can file consent terms without admitting a violation and whether the penalty would be a steep monetary fine or a mere slap on the wrist. Examples of arbitrary use of power are available in almost every aspect of SEBI’s functioning. Some of these instances become public because of the efforts of aggrieved investors, intrepid activists, corporate rivals or research by those who are singled out for harsh action.
Consider this: When Bharti Enterprises was in negotiations with MTN (the deal later fell through), SEBI issued a guidance exempting it from an open offer under the takeover code. The guidance itself was extremely controversial. Worse, a Right to Information (RTI) application revealed that SEBI had issued the guidance (over a weekend) even before the fee paid by Bharti was credited to its bank account. In contrast, SEBI normally takes an average of three months to issue a guidance. Bharti was the exception where the regulator acted with such incredible alacrity.
Now here is a contrast. It is only when the SEBI board decided to dump three orders of the Mohan Gopal–V Leeladhar bench to bury the investigations related to the NSDL (National Securities Depository Limited) that we realised that the regulator had been sitting on two other cases for over seven years. One was NSDL’s decision to dematerialise Dinesh Dalmia's dubious preferential allotment in DSQ Software and another case related to a depository participant called Rajnarayan Capital Market Services Limited (RCMSL). But these cases predate the IPO scam of 2006 by several years. Why had SEBI failed to act all these years?
The IPO scam investigation is another controversy. SEBI’s ham-handed attempt to suppress the Gopal-Leeladhar orders has damaged its credibility as well as that of chairman CB Bhave and the NSDL. But what about the Central Depository Services Limited (CDSL), whose original investigation report was more damaging than that of NSDL? Well, it turns out that TC Nair, the same former member of SEBI who let off the Zee group with just a warning despite its deep involvement in the Ketan Parekh scam, also closed the investigation into CDSL with an airy one-line order that didn’t go into the merits of the case. But since the finance ministry is now an active participant in most of SEBI’s decisions, there is no objective review of its actions and its failings.
The regulator’s arbitrariness extends to issues such as mutual fund advertisements. On 3 June 2009, SEBI issued a show-cause notice to Reliance Mutual Fund and threatened to stop its new fund offer for Reliance Infrastructure Fund, since it was a day late in submitting its advertisement for review. Reliance was told that the disclaimer fell short of the mandatory 5-second airtime. The speed of action would have been remarkable if it were consistently applied to all MFs. Investor activist Vijay Trimbak Gokhale alleges that SEBI has been soft and benign with three others, namely, Shinsei Industry Leaders Fund, Fidelity India Special Situations Fund and UTI Mutual fund (UTIMF).
While no order has been issued against UTI for its advertorials in a newspaper, a SEBI executive director hinted to Mr Gokhale that the regulator may have leaned on UTI to stop them. There was no formal order, nor a response to the complainant. While it is difficult for me to accept Mr Gokhale’s extreme standards in judging the fairness of the UTI, Shinsei and Fidelity advertisements, SEBI’s double standards in issuing an intemperate show-cause notice in one case while ignoring other complaints is also difficult to accept.
This erratic enforcement of rules is especially worrying because of the thoughtless trial balloons being floated by the government through the media. The first is SEBI’s attempt to amend the rules to permit SEBI officials to become members of the Securities Appellate Tribunal (SAT). This would allow SEBI officials passing irrational orders to ratify them at the appellate level too, either directly or indirectly. This would be a travesty of justice. The second is supposedly a proposal to convert SEBI into a super-regulator by permitting it to regulate the commodity as well as currency markets. The efforts to further empower SEBI may eventually come a cropper because the agriculture ministry and the Reserve Bank of India, respectively, are not likely to give up control over these markets very easily. But shouldn’t the SEBI house be put in order first? Or is someone deliberately floating rumours to silence corporate India and market intermediaries? After all, the signal is that, despite the ugly controversy over suppressing inconvenient quasi-judicial orders to protect the chairman, the government may empower the regulator rather than order it to clean up its act. Having watched SEBI closely since its inception, I would say this is not beyond the realm of possibilities at all.